Lesson 2: Market Structure
Dear Lex & Crypto community,
Here is the Second Lesson of the Series — Market Structure
Sit back and hold tight! HAPPY TRADING!!
What is market structure and its importance?
Market structure gives you a dialogue when reading the market. When you follow the market structure you can easily determine the flow of the market and place trades based on the trend direction. The market structure forms and gives you an idea of when the market comes to a stop and starts a directional trend.
Reading market structure gives you an idea of which way price will flow and you can “trade the trend”.
Using USDCHF market as an example since it's one of the markets I am most familiar with that has a clear view of market structure.
A) Market Range
A market ranges prior to starting a directional trend.
A market will range and the directional trend is based on order flow conditions (will cover in a later lesson) When a market comes off an accumulation phase it’s always followed by an uptrend, when a market comes off a distribution phase it’s always followed by a downward trend.
In the example below the market is in a well-defined range with a swing high and swing low on each side on a high time frame (weekly).
The market goes from a trending to a ranging environment and from ranging to a trending environment. When a market ranges it's either accumulating before it starts a trend up or distributing before it starts a trend down.
B) Market Structure
1. In order for price to continue an upward trend it needs to make a higher high meaning it would need to break and close outside the high to the left. Price fails to make a higher high and instead proceeds lower.
2. Price comes into the low of the range and failed to make a higher low but rather closed outside the low on the left. At this point market structure has been broken and a possible market structure shift is in play.
3. Price comes back to the mid level of the range and struggles to trade above and instead makes a lower high. More indication that a shift in market structure will occur.
C) Market Structure Shift
1. Series of lower highs and lower lows start to form. The market is in a clear downtrend and every time a swing low is made is when you should look for short opportunities and zoom into well defined levels. You can use levels such as weekly opens-monthly opens- daily opens to give you an ideal entry in regards to the directional trend.
2. Good example of an ideal entry revolved around directional market structure. Price raids a previous swing high prior to continuing downward trend.
3. Downtrend continuation- market continues after presenting a trading environment.
D) Use Case Scenario
Using the example from above in greater detail:
1. Swing high forms (Lower High). Using our lower high as our swing high we mark out the level and we take note that price has come into it.
2. Swing High Swept Zooming into a time frame that gives us more information we can see that price has swept/deviated the lower high in an attempt to break market structure to the upside. After engineering liquidity by running the previous swing high (lower high) we can assume based off the directional trend that the market will continue downward after failing to shift market structure to the upside.
3. After price previously swept the swing high we get a third drive in which the risk reward supports shorts since the trend is downward and price has swept a previous high.
Entry: After price sweeps you would enter on the third tap. If bearish there would be no need to run the same high twice. I’ll elaborate more when i go over ranges.
Stop loss would be placed above last recent high. Target would be the last lower low prior to make a lower high. Easy 23R setup +